Category Archives: rants

Platforms are Needed to Accelerate Procurement Agility – But Don’t Overlook the Offline Contributions

Over on Spend Matters UK, the public defender wrote a great post on “Why Platforms are Needed to Accelerate Procurement Agility” and discussed how the digitization of our everyday lives through cloud-based services served up over the internet is arguably the single greatest consumer trend of the modern era. In this post, he noted that the digitization trend has also worked its way upstream into B2B value chains and since businesses don’t want to be “digitally disrupted” by others they are searching for new supplier capabilities they can serve up as new customer-facing services.

This is a great use of digitization capability where it makes sense, but it’s not just online agility that is needed, it’s offline too. And this is where modern platforms can make the most impact.

Consider the NPD/NPI lifecycle. Right now, what typically happens is engineering works in their own little world designing a product, and when it’s mostly done, they contact procurement to help them find sources of supply and qualify their preferred manufacturing houses. This is typically done in CAD/CAM software, disconnected from everything, and can be a slow process.

Initial design might have to be slow, but the fact that its disconnected can really slowdown the NPI cycle. If design is not plugged in to the rest of the enterprise, and Procurement cannot be involved from day one, the engineers might choose discontinued parts, work with unfavourable suppliers, or even work on features that are not desired by the majority of current customers.

Then there is sourcing. Without advanced knowledge, Sourcing will not only need ramp up time to identify sources of supply, but might be stuck trying to source materials in limited supply that have a locked in price higher than the organization can afford if it wants to meet cost targets. Early involvement can help Engineering understand where the cost is and select the right design options when it has a choice.

Then there is inventory and manufacturing planning. Procurement needs to be plugged into marketing and sales to accurately estimate demand, and have to be in tune with supplier production capacities and shipment times to make sure orders are placed on time and stock-outs can be addressed quickly in times of demand surge.

The only way NPD/NPI time can be minimized is if the process goes smoothly. The only way this can happen is if Procurement is involved from the beginning and can connect with each impacted department in the organization at the right time and can communicate with suppliers quickly and consistently. This can only be done with a modern platform and illustrates why platforms are truly needed for Procurement agility.

Procurement is Still the Rodney Dangerfield of the Organization and Land of Confusion Is Its Theme Song

Why else would we need an egalitarian Procurement Revolution where we must work collectively to shape and drive change?

But in all seriousness, the numbers don’t lie. If you check out “Five Imperatives for Creating Greater Procurement Agility”, which was recently (and still may be) temporarily free from The Hackett Group, you see that the average Procurement Function Operating Budget is forecasted to increase a mere 1.1% this year. Now, that’s better than last year where it was forecasted to increase a mere 0.7%, but when you consider the average annual US inflation rate from 2000 to 2015 was 2.25% (which you can verify on a number of sites), relatively speaking, Procurement is still getting further and further behind every year!

This is despite the fact that world-class procurement (which needs to be properly funded), has an average payback that is twice that of the Procurement peer group. And, as far as the doctor is concerned, the argument that, since world-class procurement organizations have 18% lower operating costs than the peer group, Procurement doesn’t need as much money, doesn’t pass muster because “operating” costs are different from “capital” costs and might or might not include “training” costs or “travel” costs.

If the organization is doing a lot of outsourcing, then a lot of travel is needed by procurement, engineering, etc. for relationship and quality control site visits, and if all of this has to come out of the Procurement budget, as opposed to the operations budget, that’s not fair. If Procurement is not allowed to spend “capital” to acquire a new system, but must instead use a SaaS solution so it can be expensed monthly under the “operating” budget, while manufacturing and warehousing gets a budget that does not include the ERP upkeep, that’s not fair. If Procurement is subject to the across-the-board training ban, because people should know their jobs when they are hired, and are deprived of the ability to advance their skills, not only is that not fair, but that can be costing the organization millions of dollars as sometimes a better informed and prepared procurement professional can shave an extra percentage point off of a hundred million dollar buy, which makes the 10K it cost to send the person to a 3 day workshop paltry in comparison.

Plus, when sales has to increase revenue by $10 to equal the same savings that Procurement often makes by taking $1 off of the bottom line, it should, logically, make sense to throw money at Procurement instead of the marketing mad men or the house of lies consulting firm. But it doesn’t, proving that most board rooms are still cemented in the land of confusion and Procurement is still the Rodney Dangerfield that don’t get no respect with a kick-me sign on its back.

Navegador Nightmares? It’s Your Own Damn Fault!

In the midst of the recent receivership of Hanjin shipping, the seventh largest shipping line by overall capacity, there are a lot of trepidations, fears, and worries by companies that use it for shipping, and in particular, companies that already have cargo on its ships. (As noted by Bob Ferrari over on Supply Chain Matters in The Financial Shot Heard Across the Globe, many global ports will not accept nor export cargo on the carrier’s vessels because of uncertainties as to whom we pay charges or more importantly, whether specific vessels will be seized by creditors as captured assets, meaning that not only can vessels on the water not be loaded, but they can’t be unloaded.)

Now, if you happen to be working in one of the organizations relying on this carrier, directly or indirectly, you’re probably screaming “how did they let this happen” (where “they” is, in your mind, poor management) and “what the hell do I do now” (and the answer is easy, what you should have done in the first place, and we’ll get to that) and that would be fine, if you were focussed on the right “they” and were simply choosing among your different (pre-planned) disaster recovery options, but chances are it’s the wrong “they” you are focussed on and, as the organization never allowed Supply Management the time to do proper risk assessments and disaster recovery plans, there are no backup plans ready to go.

The short answer is unless you are including yourself in the “they”, as the “they” is all of the Procurement and Logistics managers who not only selected the carrier but encouraged the excessive growth, and unless you are acknowledging that your lack of a disaster recovery plan for this very predictable likelihood (as it’s easy to identify a supply chain choke point and what could go wrong – in this case, all your products in containers on the same ship and that ship all of a sudden going missing, and whether it sinks, gets captured by pirates, or seized by creditors is irrelevant from a recovery point of view), you’re not focussed on the right questions, what you should do about it, and what you should have done in the first place.

Maybe you had little option (as you were shipping from Korea and this was the only reasonable shipping deal you, or your 3PL, could cut), but you could still plan on a lost shipment, have a supplier with excess capacity (in overtime if necessary) that could replace the shipment quick, and a back-up (more expensive carrier) ready to activate if needed (along a different route). This would be okay and proper, especially if you really did need to outsource to Asia, but how many companies did it okay and proper? Judging by the number of articles and semi-widespread panic (and fears of more receiverships and bankruptcies because of the over-capacity, not too many).

But chances are you got yourself into the situation where you had little option, by far-sourcing something you didn’t need to far-source. You got caught up in the outsourcing craze in the 90’s, believed all the hype about lower costs (because of lower unit costs due to weaker Asian currencies, lower wages, etc.), and didn’t look at the full TCO, which also included transportation costs that could be 10X what you were paying when you were near-sourcing from Central America (from the US), skyrocketing T&E costs (because if you didn’t go on-site regularly, you didn’t get what you wanted), and phone-bills that looked like office building lease payments. And maybe if you were in electronics China and Korea had the better factories, but how hard would it have been to invest in new factories in Mexico and Brazil, relocate the necessary top-talent to get them going, and recoup the initial investment in orders of magnitude over a ten to twenty year time-span? Not hard.

Basically, by outsourcing everything you could identify faster than rabbits without any natural enemies can breed, you built up a need for a lot of capacity, which the industry responded to, but when you kept going, the shipping industry, not wanting to get caught with its pants down again, analyzed the trends and kept building. Then, when oil went through the roof, and the smarter companies realized that long-term strategic near-sourcing (and, when possible, home-sourcing) was actually the best option after all was said and done, and pulled back, there was glut capacity and the shippers, who overbuilt, were now stuck with capacity, overhead, and loans they couldn’t pay. This is all a result of poor long term planning on the part of Procurement, and your predecessors, which, in all honesty, you should have been endeavouring to fix as each and every outsourced category came up for re-sourcing (as you should only produce products in Asia for Asia if you can help it — even FoxConn has realized this and opened a Brazilian factory — slow ramp-up not withstanding).

So, whether you created the mess or not, you’re in the job now and it’s up to you to fix it, and the navegador nightmares, the doctor is sad to say, are your own.

Who Do Catalogs Serve? Not Who They Are Supposed to!

Over on Spend Matters, the prophet and the maverick recently co-authored a post that asked “Do Catalogs Serve Suppliers or Buyers More?”. The answer varied depending upon the (age of the) platform, the implementation, the intent, and the author, but the simple answer — which did not really come through loud and clear in their post(s) — is not who they are supposed to serve. Especially if it’s a first generation catalog.

We’ll take first generation catalogs first.

A first generation catalog is nothing more than an electronic version of a paper catalogue — and when you are in a rush to find and order a product, how good is that? With a paper catalogue, you flip to the index, hope the keywords you can think of are there, and hope the product on the page you flip to will do the job at a decent price. With an e-catalog, you are scanning through a keyword index or searching keywords and hoping the right product at the right price comes up. Not that useful, whether you are the buyer (who may or may not find what you want) or the supplier (who may or may not have their product found and requisitioned), especially when the buyer has to search each catalogue separately and will stop when the find the first acceptable product (which could be in another supplier’s catalog).

A second generation catalog is a bit better as it indexes all text, allows all supplier catalogs to be searched simultaneously, allows side-by-side comparison, single cart, and automatic PO splits across suppliers when a requisition is approved. But it’s still not perfect. The product might not be there. It might be out of stock. The price might not be right — or there may be no capability to communicate with the supplier for clarification on important details. The buyer is not served, and the supplier is not served.

Third generation catalogs are much better, and were supposed to solve the issues as they also allow punch-outs; real-time federated search across internal, supplier, and punch-out catalogs; communication; RFX; preferred and contract items to be weighted or forced to the top of the listing; budget integration; and visual guilt features, to make sure a buyer buys what should be bought when and how it should be bought. This helps Procurement help buyers buy on-contract items on-contract and steer purchases to preferred suppliers. And it helps suppliers because they know if they have a contract or are preferred, buyers will be guided to them.

But it doesn’t serve either party if the need isn’t served by an on-contract item in stock at a preferred supplier, because the buy might not be appropriate for catalogs in the first place. If the buyer buys an overpriced item via punch-out, that doesn’t help Procurement. And if the buyer buys the wrong product from the supplier when there was a better one, the supplier gets a bad rap and may not be bought from again.

The problem is catalogs, like GPOs, are presented as the be-all, end-all tail-spend management solution when, in reality, tail spend (as pointed out in Sourcing Innovation’s recent paper on An Introduction to Tail Spend — and why you need a technology-based solution, tail-spend is a very complex beast that is often only suitably served by a mix of catalog, RFX, and auction buys, often optimization-backed, with the solution varying with market conditions and particularities of the need.

And a catalog will never tell you when it is the right — or wrong solution. So unless it’s only a part of a full tail-spend suite, with expert guidance (via expert programmed workflows), it won’t even come close to serving either party. Remember that before buying a “new and improved” e-Catalog solution.

The Death of Factoring Will Be Highly Exaggerated

Last Friday, Spend Matters published a great Friday rant by the prophet aptly titled “Die Factoring, Die”! because Factoring can be the death of many an uninformed supplier who, like desperate individuals, take out payday loans to pay off payday loans at insanely compounding interest rates until they go bankrupt.

Factoring should die. It is no longer needed, but the doctor fears just like the pulp industry has survived for over a century when it should have died out long ago, it will still be around a century later. Just like the pulp industry had the perfect environment to grow until it was big and powerful enough to effectively outlaw the competition, the factoring industry has the same perfect environment to grow and crush the better options.

Before we explain, we’ll point out that just like there is a better alternative to factoring, as the prophet pointed out in his post, there is a better alternative to wood-based paper. In particular, the alternative that was around before the wood-based paper craze: hemp. Whereas hardwood trees take decades to mature, hemp can be grown and harvested in a single growing season. It’s the number one biomass producer on the planet (10 tons per acre in 4 months) and contains 77% cellulose (needed for paper) compared to the average tree at 30%. It’s stronger, the paper lasts centuries longer, does not require any bleaching, and the production requires significantly less water and energy than paper production from trees. (The pulp and paper industry uses more water to produce one ton of product than any other industry and is the fifth largest consumer of energy on the planet.) Hemp for paper is many order of magnitudes better, but since hemp (which contains, on average, 1/5 to 1/10th the THC of cannabis) was made illegal with the delegalization of THC in North America, it’s not an option.

This was possible because the pulp and paper industry was rich and powerful enough to lobby for the delegalization across the board, vs. just the delegalization of cannabis. They got that way because, during the start of the industrial revolution, when paper was needed en-masse to “power” back offices, North America was filled with old hardwood forests and there was not much hemp, as hemp was native to Central and South America. The population was much smaller than it is now, the possibility of deforestation was not even considered (as manual logging could only go so fast), and the technology to produce paper from pulp was understood and easy (at the time). And it could meet demand fast — logging could happen year round whereas hemp could only be harvested once a year in many of the central and northern parts of the US. So it became the defacto paper producing industry, and since everyone needed paper, it obtained a monopoly. And since no one knew better, or was even allowed to learn of a better way, the monopoly persists until this day.

Similarly, the factoring industry has obtained a monopoly on what is effectively “payday lending” to suppliers that need money now, can’t get it from the bank, and don’t want to beg the local “godfather” for a loan (at interest rates that put even North American credit card companies to shame, with default penalties much worse than repossession). How did it get like this? First of all, there have been no other viable options for many of these suppliers (as not all suppliers are lucky enough to get buyers that will offer the [slightly] better alternative of early payment discounting, as not all buyers can afford that). Secondly, growth demands working capital, and the capital has to come from wherever it can, and if you are a supplier in an emerging or tight market, it’s often factoring or death. Thirdly, the banks stayed out of it for too long, allowing the industry to grow and cement on its own, and now that it is “proven”, the banks have been drawn to it like moths to a flame, and they control the global cash flow.

So as long as it is effectively a cash cow, which it is as it is a slow cash drain (death) for most suppliers (meaning that you’ll acquire and keep more customers in a year than you bankrupt), more suppliers need it everyday (as they try to stay in business when times become troubled or they try to grow faster than they can afford), and it’s relatively low risk compared to other types of lending, it’s going to continue to gain support and traction from the lenders, who are going to do their best to present it as the only option available. And some suppliers will believe, lock-in, and get trapped in the factor cycle, factoring more and more invoices over time until every invoice needs to be factored as soon as it is issued just so the supplier can make payroll.

So even though modern platforms, backed by “big data” (even though the data doesn’t have to be all that “big” to adequately calculate risk and buyer payment time-frames), and enabled by networks (that give the supplier dozens or hundreds of options including half a dozen or dozens of better ones), could provide better options, the doctor just doesn’t see it happening any time soon. We’ve known since 2000 that multi-line item optimization can save an organization 10% or more on just about every sourcing event (and since Aberdeen’s advanced sourcing study in 2005 that it will save an organization an average of 12% across all categories) and still less than 10% of organizations using strategic sourcing platforms are effectively employing it — even though modern optimization-backed sourcing platforms make it easy enough for even junior buyers to use it self-serve and run basic models and identify considerable savings without expert support. (Not always the full 10% to 12%, but enough savings to justify its use on each and every event!) Factoring is finance, and banks have made finance unnecessarily complicated to maintain the monopoly. So it’s here to stay. And when big data and networks enter the picture, you can bet it will be the factorers, and not the factorees, that gain.

It’s sad, but for now — and the foreseeable future, it’s true.